The Cost for the Next KW

RE-ITERATING THE POINT MADE IN THE LAST POST, THE COST FOR EACH ADDITIONAL KW OF INTERMITTENT GENERATION (SUCH AS WIND AND SOLAR) INCREASES AS PENETRATION INCREASES. THIS IS DUE TO THE FACT THAT OUR GRID DEMANDS VERY HIGH LEVELS OF UPTIME (99.9%) AND THAT THE ONLY WAY TO INCREASE THE RELIABILITY OF INTERMITTENT SOURCES OF ENERGY IS BACK-STOP THEM WITH COSTLY REDUNDANCY.  

Previously, we discussed the number of intermittent generation sources required to increase the "uptime" of the generation.  There is a 2013 paper located here that looks at the value of renewable energy as a function of penetration. The key point is here:

alt_energy_value.png

The "market value" is "the revenue the generators can earn on markets, without income from subsidies". The "generators", in this case, are the companies running the sources of energy. And the "markets" are the open markets on which energy is bought and sold. 

The paper is exhaustive, dense, and loaded with interesting data. But it makes a very interesting point that is lost on most that discuss energy policy: The first KW of generation is very economical. The last KW of generation added to the grid is extraordinarily expensive--precisely for the reasons discussed in the last article.

Warren Buffet said in 2014: "I will do anything that is basically covered by the law to reduce Berkshire's tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit."

Now, this won't be true forever. But it does require the cost of alt-energy to fall by a lot in order to get its penetration higher sans subsidies (and as penetration gets higher, the gov doesn't have enough to subsidize). If the graphs above are to believed, it suggests the the cost of wind and solar need to fall by half make the transition from 3% to 30% penetration interesting. 

How long might that take? A 2016 report by the DoE shows that LCOE (levelized cost of energy) for wind has optimistically fallen from about $70/MWh in 1998 to about $43/MWh in 2015. This is a 39% reduction over 17 years, which is just shy of 3% per year (2.8% YoY).

Wind_LCOE.PNG

And so, if you want to know how long it will take for the cost of wind to fall by half, and if you expect current cost trends to continue at 2.8% per year, then you'd need to wait 25 years. In other words, absent subsidies and assuming the cost of other energy sources remains fixed, it probably won't make sense to take wind or solar to the 30% penetration levels until the costs of each fall by half over the next 20 years or so. 

Is this true everywhere? Of course not. Denmark and Texas is situated such that wind is plentiful. And Arizona is situation such that sun is plentiful. And when it makes sense, the build-out will happen as long as it makes economic sense. 

If your belief is that subsidies are a good thing because it will accelerate the arrival of a new technology, then you might also be thinking that subsidies will shrink the time to "mass market" from 10 to 5 years. But what if it instead means it shrinks the time from 35 years to 30 years? Then what?

 

Alt Energy Redundancy and the First KW Cost